Amended China Individual Income Tax Law has far reaching impact

On 31 August 2018, the Standing Committee of the National People’s Congress passed the amendments to the Individual Income Tax Law (the “IIT Law”) during the 13th National People’s Congress of the People’s Republic of China. This is the seventh amendments since the enforcement of IIT Law in 1980. The last amendment was made in 2011.

When in force?

The amended IIT Law will become effective on 1 January 2019. However, as early as 1 October 2018, income from wages and salaries, income derived by entrepreneurs, business income as well as income from subcontracting and leasing will adopt the new tax tables and new basic monthly deduction.

Key changes

The table below summarises the major changes in the amended IIT Law.

Existing rule

New rule

Article 1Tax resident

An individual with domicile in China or without domicile in China but stays in China for one year or more is considered a resident in China and shall pay IIT for income derived in and out of China.

An individual without domicile in China or with domicile in China but stays in China for less than a year is a non-resident. Only income derived in China is subject to IIT for non-resident.

An individual with domicile in China or without domicile in China but stays in China for 183 days or more is considered a resident in China and shall pay IIT for income derived in and out of China.

An individual without domicile in China or with domicile in China but stays in China for less than 183 days within a tax year is a non-resident. Only income derived in China is subject to IIT for non-resident.

A tax year refers to a calendar year.

Articles 2 and 3Consolidation of income and introduction of “business income”

The following types of income would be taxed separately subject to different rates:

3% to 45%

wages and salaries

20% to 40%

income from personal services

5% to 35%

income from production and business operations by entrepreneur

income from subcontracting or leasing operation of entities or organisation

20%

income from authorship

royalties

interest and dividends

income from leasing of property

income from transfer of property

incidental income

“Consolidated Income”: 3% to 45%

The following 4 types of income will be grouped under “consolidated income”

wages and salaries

income from personal service

income from authorship

royalties

“Business income”: 5% to 35%

The original “income from production and business operations by entrepreneur” and “income from subcontracting or leasing operations of entities or organisation” are replaced by “business income”

The following types of income remain unchanged at 20%

interest and dividends

income from leasing of property

income from transfer of property

incidental income

Article 6Deductions

For wages salaries

Monthly basic deduction of RMB3,500

Statutory social security and housing fund contributions

For consolidated income

Monthly basic deduction increase to RMB5,000

Other than statutory social security and housing fund contributions, adds new specific deduction such as:

education fees for children

continued education

medical expenses for serious illness

mortgage interest or rental expenses

elderly care expenses

Article 8Anti-avoidance rule (new)

N/A

Empower the China tax authorities to make tax adjustments in respect of the following situations:

Related party transactions are not on arm’s length basis leading to reduction of tax paid by an individual / a related party

A resident individual controls an entity in a low-tax jurisdiction by himself or together with a tax resident enterprise, and that entity does not distribute profits to the individual or reduces the profits to be distributed to the individual without proper business reason

An individual obtains inappropriate tax benefits due to arrangements without proper business reason

What are the tax rates?

The existing 7-bracket progressive tax rate scale from 3% to 45% remains the same but tax brackets at 3%, 10% and 20% have widened.

Table 1 - Consolidated income

Level

Existing (Note 1)

New (Note 2)

Tax rate (%)

Monthly taxable income
(RMB)

Annual taxable income(RMB)

Monthly taxable income
(RMB)

Annual taxable income(RMB)

1

0 – 1,500

0 – 18,000

0 – 3,000

0 – 36,000

3

2

1,501 – 4,500

18,001 – 54,000

3,001 – 12,000

36,001 – 144,000

10

3

4,501 – 9,000

54,001 –108,000

12,001 – 25,000

144,001 – 300,000

20

4

9,001 – 35,000

108,001 – 420,000

25,001 – 35,000

300,001 – 420,000

25

5

35,001 – 55,000

420,001 – 660,000

35,001 – 55,000

420,001 – 660,000

30

6

55,001 – 80,000

660,001 – 960,000

55,001 – 80,000

660,001 – 960,000

35

7

Above 80,000

Above 960,000

Above 80,000

Above 960,000

45

Note 1: Tax rates apply on wages and salaries.

Note 2: Tax rates apply on consolidated income.

Table 2 - Business income

Level

Existing (Note 3)

New (Note 4)

Tax rate (%)

Annual taxable income(RMB)

Annual taxable income(RMB)

1

0 – 15,000

0 – 30,000

5

2

15,001 – 30,000

30,001 – 90,000

10

3

30,001 – 60,000

90,001 – 300,000

20

4

60,001 – 100,000

300,001 – 500,000

30

5

Above 100,000

Above 500,000

35

Note 3: Tax rates apply to income income from production and business operations by entrepreneur and income from subcontracting or leasing operation of entities or organisation.

Note 4: Tax rates apply on business income.

What are the implications?

The latest amended IIT Law has far reaching impact. The change that attracts the most discussion is undoubtedly the tightening on tax resident threshold from one year to 183 days.

For foreign individuals (including those from Hong Kong, Taiwan and Macau) currently working in China, the biggest concern is whether worldwide income would be subject to China IIT after spending 183 days in China within a year. As the threshold is so low, it is almost certain that anyone working full-time in China would be subject to IIT on their worldwide income according to the amended IIT Law.

Under the current Detailed Implementation Rules of the IIT Law, an individual without domicile in China would only attract IIT on worldwide income if he/she stays in China for five full consecutive years. Can they still rely on this five-year rule to protect them from worldwide income subject to IIT only after 5 years? Would the 5-year rule be revised?

Once a foreign individual becomes a resident in China, would he/she trigger the obligation to update the tax resident status with a financial institution at home jurisdiction where he/she maintains a financial account leading to the automatic exchange of information between home jurisdiction and China?

With the introduction of the new anti-avoidance rule, it is written in the law the tax authorities can make tax adjustment on individuals involved in tax avoidance arrangements.

As the amended IIT Law would have huge impact on the IIT exposure of foreign individuals working in China and frequent travellers in China, we expect more details will be released soon.

All individuals and their employers and frequent travellers to China should review their situation and fully understand the IIT implications under the amended IIT Law due to the potential impact.